UP defends precision scheduled railroading amid service struggles

Union Pacific’s net profit rose 22% to $1.6 billion in Q1

By Joanna Marsh for freightwaves.com

Service issues Union Pacific experienced in the first quarter weren’t due to precision scheduled railroading but to crew shortages, executives told investors during UP’s first-quarter 2022 earnings call Thursday.

Rail stakeholders, such as the unions and some trade groups, have blamed PSR, an approach adopted by the Class I railroads to streamline operations, for recent service disruptions.

But PSR is helping UP manage service recovery efforts more efficiently than past instances in which there were service meltdowns but no PSR measures in place, according to President and CEO Lance Fritz.

“Unequivocally, PSR has been a benefit to the railroad, even in our current environment,” Fritz told investors. “Let’s go back to what it means. It means we try to touch cars the fewest amount of times necessary to satisfy demand for our customers. … That by itself allows us to have excess capacity” at UP terminals.

What caused the service disruptions was insufficient numbers of train, engine and yard employees to meet the demand, Fritz continued. When UP experienced adverse winter weather conditions in February, it didn’t have enough excess resources to address those disruptions. As a result, inventories built up and customers put more railcars on the network to get their needs met. What resulted was a “self-reinforcing negative cycle,” Fritz said. 

“I’ll blame it on us and shame on us — we got to a place where we did not have the crew availability. … So as we look forward, what we have to do is make sure that our business planning processes for resources are rock solid, and that we do a better job of making sure that our network and our resources and our plan is tightly coordinated with customers and their needs.”

To ensure that UP has sufficient staffing, the railroad has a goal to onboard 1,400 trainees in 2022. So far, UP has a training pipeline of roughly 500 employees, according to Eric Gehringer, executive vice president of operations. UP also graduated over 250 new transportation employees in 2021, while almost 400 have graduated in 2022. 

In addition to an aggressive hiring initiative, UP is tackling service issues by looking at how it deploys crews and locomotives and by reviewing its transportation plans, Gehringer said. 

Union Pacific reported its first-quarter 2022 financial results on Thursday. (Photo: Jim Allen/FreightWaves)

UP is also working with customers to reduce the number of private railcars on the network. That action has been controversial among some shippers, but UP is using data to help determine how best to approach those reductions, according to Kenny Rocker, executive vice president of marketing and sales.

“Trust me, there have been some difficult conversations, but I’ve been very encouraged with the initial response from our customers and their willingness to reduce their railcar inventory,” Rocker said. “So we’ll continue to have those discussions and we’ll continue to engage them and be transparent and utilize data.”

(Union Pacific)

UP executives told investors that the company is ready to discuss service issues with the Surface Transportation Board, which has called the U.S.-based Class I railroads to a public hearing next week to talk about rail performance.

“The STB appropriately is hearing from customers and wants to talk about it. That’s what next week is all about. We’re well prepared for those conversations and to share with the STB how we’re investing and planning to continue to improve and recover and then be stable going forward and reliable and consistent,” Fritz said. 

“From our perspective, this is all about getting our labor right, getting utilization right, making sure the other resources are ready and then executing. It’s not much more complex than that right now.”

UP also has excess terminal capacity at the ports of Los Angeles and Long Beach, and it is seeking to encourage ocean shipping partners to put more international boxes on the railroad so UP can ship them inland, according to Fritz.

The railroad welcomed efforts by its competitor BNSF (NYSE: BRK.B) to ramp up that railroad’s intermodal business through its partnership with J.B. Hunt. UP partners with Knight-Swift, Schneider, XPO Logistics and the Hub Group.

“That kind of competition between us and our channel partners and them and their channel partners is fantastic for the users and the customers of domestic intermodal,” Fritz said.

Union Pacific Q1 2022 financial results

Despite the service issues, UP posted a net profit of $1.6 billion, or $2.57 per diluted share, in the first quarter of 2022, which is a 22% increase from a net profit of $1.3 billion, or $2 per diluted share, in the first quarter of 2021.

“Union Pacific translated revenue growth from a strong economy, our focused business development initiatives, core pricing gains and positive business mix into solid financial results,” Fritz said in a release. “Operationally, we did not meet expectations, which is having an impact on our customers. We are taking actions to improve resource utilization, increase crews and locomotives where needed, and reduce freight car inventory levels to restore fluidity.”

Revenue grew 17% in the first quarter to over $5.86 billion amid a 4% increase in volumes. A 29% increase in coal and renewables volumes plus a 25% increase in metals and minerals volumes lent support to the overall increase in volumes and revenue. Core pricing gains and a positive business also contributed to higher revenues, UP said.

Operating expenses rose 16% to $3.48 billion on higher fuel expenses.

Operating income rose 19% to $2.4 billion. UP’s operating ratio was 59.4% compared with 60.1% in the first quarter of 2021 amid a “positive impact from 2021 weather events” but was negatively offset by higher fuel prices, UP said.

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